Updated: Jun 9
Inflation in the United States is 7.7%, but a big drop may be coming.
During former president Donald Trump's 2024 campaign announcement on Tuesday, he claimed that inflation is at a 50-year high. How he got the stat wrong is anyone's guess, as the line "inflation is at a 40-year high" is perhaps the most repeated phrase in recent weeks.
Indeed, the last time inflation was 7.7% in the United States was February of 1982, down from its peak two years earlier at about 15%. In fact, today's inflation rate is a far cry from the 20% inflation that came in 1920 and 1947.
Nonetheless, American consumers, which is everyone, are eager to know when commodity prices like gasoline will stabilize and inflation will return to the ideal rate of about 2%.
Although less affected than in notable European countries, gasoline prices in America are essentially a derivative of the price of oil in our modern globalized economy. The good news for potential stability is that the oil price has returned to where it was before the Russian invasion of Ukraine in February of this year, 92$ a barrel.
Year-over-year inflation has declined by 1.3 percentage points over the past four months. Therefore, assuming commodity prices are stable, it would take about 16 months for inflation to return to the ideal rate.
But it is perhaps more valuable to look at the recent oil price trend specifically. During the six months of November 2021 until May 2022, the price of oil rose from 70$ a barrel to 116$ a barrel. That is a global crisis causing rise of 66%.
That is why, assuming the price of oil won't skyrocket again, you can expect inflation to drop drastically between January and May of next year.
Should we ever assume that global oil prices will ever be stable? Probably not considering its volatility in the past 20 years, but more specifically because oil companies are making headlines this year for their unwillingness to invest in more drilling.
Why aren't they investing in drilling? Because governments are changing their tax laws to meet climate targets. As a result, the profitability of oil drilling is declining, and so there is less supply.
The transition away from gasoline and natural gas is causing an inevitable rise in its cost, which will hit the slowest people and places to adopt green alternatives the hardest. That is why the best way to be prepared for future global inflation episodes is to be as efficient and minimalist as possible with consumption.
As for the European countries facing the highest inflation in the west, they have only their continent's previous reliance on Russian gas to blame. It is easy to imagine a similar future global energy cost crisis brought by tensions between the west and one of the biggest oil producers - Saudi Arabia.